Since the passage of the CARES Act (Coronavirus Aid, Relief, and Economic Security), individuals and business owners have been unpacking this $2 trillion comprehensive emergency relief package.
As part of the emergency relief package, there are multiple provisions to help small businesses and employees weather the economic downturn.
There are several key provisions that business owners may want to explore.
1. Lending relief options available to business owners
Paycheck Protection Program (PPP)
This new guaranteed loan is being offered through the Small Business Administration’s 7(a) loan program and is designed to help small businesses meet their daily expenses including payroll, retirement and health benefits, insurance premiums, mortgage, rent, and utility payments. Borrowers must make a good faith certification that the loan is necessary due to the economic uncertainty caused by the pandemic crisis and that they will use the funds to retain workers and maintain payroll. A portion of the loan may be forgiven if certain requirements are met.
- Businesses and non-profits employing no more than 500 employees are eligible. Exceptions apply for firms within certain industries (for example, hospitality) where the 500-employee limit applies on a location-by-location basis. Sole proprietors and independent contractors are also eligible.
- The maximum loan is the lesser of (a) $10 million or (b) the average monthly payroll cost from the past year times 2.5; payroll costs will be capped at $100,000 annualized for each employee. ($100,000 cap applies to cash compensation, not non-cash compensation such as health and retirement benefits)
- Loan terms are the same for all borrowers – two years at an interest rate of 1.0% and loan payments will be deferred for six months with interest accruing over this period.
- There are no borrower or lender fees and no collateral or personal guarantees required.
- Applications must be processed by June 30, 2020; however employers are encouraged to apply as soon as possible since funding for the program is capped by the federal government.
- The amount forgiven is equal to payroll costs (including health and retirement benefits), rent, pre-existing debt interest, and utility payments incurred over the 8-week period beginning with the origination date of the loan. The amount will be reduced proportionally by any decrease in the number of full-time employees compared with the prior year.* The amount would also be reduced if compensation declines more than 25% compared with the prior year. Any amount forgiven is not considered taxable income.
*Employers may avoid a reduction in loan forgiveness by rehiring laid-off workers by June 30, 2020.
For more detail, see the Treasury Department’s fact sheet on the Paycheck Protection Program.
Economic Impact Disaster Loans (EIDL)
These low-interest loans (maximum amount up to $2 million) are designed to help businesses recover from declared disasters. The loans provide principal and interest deferment for up to four years. The CARES Act enhances this program by providing “Emergency Economic Injury Grants” to provide an advance (within three days of applying for the loan) of up to $10,000 to small businesses and nonprofits (no more than 500 employees). These grants do not need to be repaid, even if the grantee is subsequently denied an EIDL. The grants may be used to provide paid sick leave to employees, maintain payroll, or meet increased production costs due to supply chain disruptions. They may also be used to pay business obligations, including debts, rent, and mortgage payments. Lastly, those who secured an EIDL between January 31, 2020, and June 30, 2020, are eligible to refinance the loan into a new Paycheck Protection Program (PPP) loan, and potentially take advantage of the loan forgiveness provision.
Debt relief for existing and new Small Business Association (SBA) borrowers
The SBA will cover all loan payments for existing SBA borrowers, including principal, interest, and fees, for six months. Relief will also be available for new borrowers who take out an SBA loan within six months from the date the CARES Act was signed into law.
2. Tax relief for small businesses
Employee Retention Tax Credit (ERTC)
This is a refundable payroll tax credit for 50% of wages paid by employers to employees during the COVID-19 crisis. To be eligible for this tax credit, the business must meet one of these criteria:
(1) Business operations were fully or partially suspended, due to a COVID-19-related shut-down order
(2) Gross receipts declined by more than 50% when compared with those of the same quarter in the prior year
The ERTC applies to qualified wages** paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, which means that the maximum credit for qualified wages paid to any employee is $5,000. The tax credit can be applied to the employer share of the Social Security payroll tax and is refundable, meaning that it can be applied to future payroll tax liability if it exceeds the employer portion of the Social Security tax on all wages for a particular quarter.
Importantly, an employer may not claim the Employee Retention Credit if receiving a guaranteed loan under the Paycheck Protection Program. And, the credit cannot be claimed on wages if a credit is obtained from the Emergency Paid Sick Leave Act and Emergency Family and Medical Leave Expansion Act.
For more detail, please see “Employee Retention Credit under the CARES Act.”
**For employers with more than 100 employees, only wages to employees not providing services will be considered as part of the tax credit calculation. For those with 100 employees or less, all wages paid during the period will be counted for the tax credit calculation.
Delay of payment of employer payroll taxes
Allows employers (and self-employed individuals) to defer payment of the employer share of Social Security payroll taxes for the rest of the year. The provision requires that the deferred employment tax be paid over the following two years, with half of the amount due for payment by December 31, 2021 and the remaining half by December 31, 2022.
Modifications of net operating losses (NOLs)
A net operating loss (NOL) arising in a tax year beginning in 2018, 2019, or 2020 can be carried back five years and applied to prior tax returns. The provision also temporarily removes the taxable income limitation to allow an NOL to fully offset income. Prior to this change, taxpayers were limited to applying an NOL against 80% of taxable income.
3. Temporary enhancements to unemployment benefits
Pandemic Unemployment Assistance
This temporary program runs through December 31, 2020 to provide payment to those not traditionally eligible for unemployment benefits (self-employed, independent contractors, those with limited work history, and others) and who are unable to work as a direct result of the COVID-19 crisis.
Emergency Increase in Unemployment Compensation Benefits
This provision ensures a federal government payment of an additional $600 per week to each recipient of unemployment insurance or Pandemic Unemployment Assistance for up to 16 weeks.
Pandemic Emergency Unemployment Compensation
Provides an additional 13 weeks of unemployment benefits through December 31, 2020 to help those who remain unemployed after weeks of state unemployment benefits are no longer available. Most states generally provide 26 weeks of unemployment benefits.
For more information on how unemployment benefits may differ from state to state please see this article.
Duplication of some provisions is not allowed
It’s important for business owners to consult with a tax professional when assessing the relative benefits of utilizing any of these provisions. In some cases, taking advantage of one option will preclude an employer of using another one. For example, employers receiving guaranteed small-business loans through the Paycheck Protection Program (PPA) are not eligible for the Employee Retention Tax Credit (ERTC). Additionally, those who wish to defer employer-paid portion of payroll taxes cannot benefit from the loan forgiveness provision.